On June 4, the U.S. Court of Appeals for the Second Circuit vacated a November 28, 2011, decision of the U.S. District Court for the Southern District of New York in which the district court declined to approve a settlement of claims that the SEC brought against Citigroup Global Markets Inc. The SEC alleged that Citigroup had negligently misrepresented its role and economic interest in selecting RMBS to be included in the pool of reference obligations in respect of a billion-dollar synthetic CDO transaction. The lower court critiqued the SEC’s practice of settling enforcement actions without requiring defendants to admit fault. The Second Circuit held that the court’s role in approving an SEC settlement is limited to determining whether there is a factual basis to support the proposed consent judgment, that the judgment is fair and reasonable, and, if injunctive relief is imposed by the judgment, that the public interest would not be disserved. The appellate court further ruled that the SEC’s discretion to settle on terms it finds acceptable must be given substantial deference, and held that the lower court misapplied the law and abused its discretion by requiring the parties to show adequacy of the settlement and the truth of the SEC’s allegations. The Second Circuit remanded the case to the district court to again consider settlement approval applying the correct, more deferential standard of review. Decision.

CIFG Assurance North America, Inc. (CIFG) filed a summons with notice against Goldman, Sachs & Co. (Goldman) in New York State Supreme Court on December 4, 2012. CIFG alleges that Goldman fraudulently induced CIFG to provide a financial guaranty insurance policy on a credit default swap in connection with the Fortius II CDO. CIFG alleges that Goldman did not disclose that the CDO manager, Aladdin Capital Management, was acting at Goldman’s behest to include in the CDO particular collateral, including RMBS that Goldman wanted to sell. CIFG asserts claims for fraud and for material misrepresentation in the inducement of an insurance contract. It is seeking reimbursement of the nearly $34 million dollars it allegedly paid under the policy it issued when the Fortius II CDO failed. Summons.

On May 22, 2012, the Financial Industry Regulatory Authority (“FINRA”) fined Citigroup $35 million for alleged rule violations, including providing investors with inaccurate information in connection with several RMBS offerings. Citigroup consented to the $35 million fine, but neither admitted nor denied FINRA’s findings. FINRA found that between January of 2006 and October of 2007, Citigroup posted inaccurate performance data and static pool information on its website after receiving information indicating that the data was incorrect. The agency further found that the errors in the information were significant enough potentially to have affected prospective investors’ assessments of six subprime and Alt-A RMBS offerings. Additionally, the organization found that Citigroup failed to maintain required books and records and failed to supervise the pricing of certain CDO securities, violating, among other things, SEC Rules 17(a)-3(a)(8) and 17a-4. AWC Letter.

On April 24, 2012, New York State Court Judge Barbara Kapnick denied a motion brought by Goldman Sachs Group Inc. (“Goldman Sachs”) to dismiss an action brought by ACA Financial Guaranty Corp. (“ACA”) arising out of ACA’s provision of financial guaranty insurance wrapping the Abacus 2007-ACI CDO issued by Goldman Sachs. ACA alleged that Goldman Sachs misrepresented material facts about the economic interest of the hedge fund Paulson & Co. Inc. (“Paulson”), an investor in the CDO. According to ACA, Paulson, which participated in the selection of the portfolio of mortgage loans backing the CDO, was represented to be a long investor but in fact took a short position against the deal. Judge Kapnick found ACA’s allegations sufficient to state a claim that Goldman Sachs fraudulently concealed the information about Paulson’s position and thus fraudulently induced ACA to insure the CDO. Order.

On April 19, 2012, the United States Court of Appeals for the Second Circuit affirmed a lower court’s dismissal of a lawsuit brought by Landesbank Baden-Wurttemberg (“Landesbank”) lawsuit against Goldman Sachs & Co. (“Goldman Sachs.”) Landesbank asserted claims for fraud, negligent misrepresentation, and unjust enrichment, alleging that Goldman Sachs misstated the quality of the mortgages underlying the collateral that backed a CDO and secretly took a position to profit from the CDO’s failure. In affirming the lower court, the Second Circuit determined that Landesbank failed to allege a specific motive for Goldman to commit fraud and failed to allege the existence of any special relationship between Goldman and Landesbank sufficient to support a negligent misrepresentation claim. Order.

On January 24, 2012, several Loreley Financing Ltd. entities filed a complaint in New York state court against several Citigroup affiliates over nearly $1 billion in CDO investments backed by subprime mortgages, purchased in 2006 and 2007. Loreley alleges that Citigroup knowingly misrepresented the quality of the mortgage loans in order to transfer risk from its balance sheet. Loreley further accuses Citigroup of concealing the role of Magnetar in designing certain CDOs. Loreley asserts claims for common law fraud, rescission of contract, fraudulent conveyance, and unjust enrichment, and seeks rescission, disgorgement, injunctive relief, and damages. Complaint.

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